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Tax-Exempt Status for Municipal Bonds at Risk
As Congress discusses extending tax provisions, they are exploring ways to raise revenue and reduce the budgetary burden.
Many of the provisions from the 2017 Tax Cuts and Jobs Act are set to expire at the end of this year, requiring Congress to find new funding sources in order to extend them.
Earlier this year, a leaked document from the U.S. House Ways and Means Committee suggested eliminating the tax-exempt status of municipal bonds. The federal tax exemption on interest from these bonds has existed for over a century, predating the country’s first income tax code. Minnesota also exempts interest income from these bonds from state income tax.
Impact on cities
Since 2015, state and local governments in Minnesota have invested $66 billion in projects financed by tax-exempt municipal bonds, resulting in an estimated $1.4 billion in taxpayer savings.
Eliminating or reducing the tax exemption on these bonds would significantly increase borrowing costs, shifting infrastructure costs to the state and local taxpayer level. Additionally, it would make it harder for small communities to access the bond market for essential infrastructure projects.
Next steps
The League of Minnesota Cities (LMC) is actively collaborating with the National League of Cities and the Minnesota Government Finance Officers Association to advocate against the removal of this exemption. LMC representatives recently met with lawmakers in Washington D.C., to discuss the issue.
Learn more about the use of municipal bonds in Minnesota (pdf).